FILE COPY Report No. 1365a-YU Appraisal of an Eighth Highway Project Yugoslavia February 28, 1977 Regional Projects Department Europe, Middle East and North Africa Regional Office FOk OFFICIAL USE ON!14 Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of April 1976), . Currency Unit = Yugoslav Dinar (Din.)* Din 1 = US$0.0555 Din 1,000 = US$55.5 Din 1,000,000 = US$55,555 US$1 = Min 18.00 WEIGHTS AND MIEASURES Metric System British/US System 1 meter (m) = 3.2808 feet (ft) 1 kilometer (km) = 0.6214 mile (mi) 1 square kilometer (km2) = 0.3861 sq. mile (mi2) 1 metric ton (m ton) = 0.9842 long ton (ig ton) ACRONYMS AND ABBREVIATIONS ADT - Average Daily Traffic BOAL - Basic Organizations of Associated Labour CPS - Central Projects Staff CRO - Council of Republican and Provincial Roads Organization CYR - Community of Yugoslav Railways ER - Economic Return RTE - Railway Transport Enterprise SAP - Socialist Autonomous Province SR - Socialist Republic TYH - Trans-Yugoslav Highway SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FISCAL YEAR January 1 to December 31 *The Dinar has been floating since July 13, 1973. The currency equivalents given above are as of April 30, 1976. APPRAISAL OF FOR OFFICIAL USE ONLY AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Table of Contents Page No. SUEMARY AND CONCLUSIONS ................................... i-iii I. INTRODUCTION .............................................. 1 II. TRANiSPORT SECTOR .......................................... 1 A. Effects of Geography and Economic Growth on Transport 1 B. The Transport System ................................ 2 C. Transport Policy, Planning and Coordination ... ...... 3 D. Previous Projects ................................... 5 III. THE HIGHWAYS ............................................. 5 A. The Network ......................................... 5 B. Traffic ............................................. 6 C. Administration ...................................... 6 D. Planning ............................................ 7 E. Investment and Financing ............................ 8 F. Engineering ......................................... 9 G. Construction ........................................ 9 H. Maintenance ......................................... 9 IV. THE PROJECT .............................................. 9 A. Objectives .......................................... 9 B. Description ......................................... 10 C. Engineering ......................................... 13 D. Cost Estimates ...................................... 14 E. Financing ........................................... 15 F. Implementation ...................................... 16 C. Disbursements ....................................... 17 H. Environmental Impact ................................ 18 V. ECONOMIC EVALUATION ...................................... 18 A. Main Benefits and Beneficiaries ..................... 18 B. Economic Evaluation ................................. 19 C. Other Project Elements .............................. 22 VI. AGREEMENTS REACHED AND RECOMiMENDATIONS ........ .. ......... 22 This report was prepared by Messrs. R. Mulligan (Engineer) and M. Ganguli (Economist). This document hu a restricted distribution and may be uwed by recipients only in the performartce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (continued) -TABL E S 1. Freight Traffic by Mode of Transport, 1958-74 2. Passenger Traffic by Mode of Transport, 1958-74 3. Cargo Handled by the Main Ports, 1958-74 4. Public Roads in the Six Republics and Two Autonomous Provinces, 1974 5. Modernization of the Highway System, 1958-74 6. Registered Motor Vehicle Fleet, 1958-74 7. Highway Expenditures in 1974 8. Financing of Highway Expenditures, 1958-74 9. Financing of Highway Expenditures in 1974 10. Design Characteristics of Project Roads ]l. Average Daily Traffic 12. Motor Vehicle Operating Costs and Savings per Km 13. Economic Returns and First Year Returns ANNEXES 1. Study of Road User Charges 2. Study of Rail Costs 3. Highway Master Plan for Kosovo 4. Transportation Projects Previously Financed by the Bank 5. Organization Chart of the Road Council of S.R. Macedonia 6. Description of Project Roads 7. Project Implementation Schedule 8. Schedule of Cumulative Disbursements MAP 10862RI Highway System - Yugoslavia APPRAISAL OF AN EIGHTHI HIGHWAY PROJECT YUGOSLAVIA SUMMARY AI4D CONCLUSIONS i. This report appraises a project for the construction of three primary highways and one secondary road, Studies of Road-User Charges and Rail Costs in Yugoslavia as well as technical assistance in the preparation of a highway master plan for the Autonomous Province of Kosovo at an estimated total cost of US$179 million equivalent, for which a Bank loan of US$56.0 mil- lion, equivalent to the foreign exchange component is proposed. ii. Transport is one of the dynamic sectors of the Yugoslav economy and road transport is now the dominant mode. Although in recent years the growth of road transport has been rapid, development of the highway network has not kept pace with it. Heavy traffic volumes on roads with substandard geometry and distressed pavements have resulted both in unacceptable levels of traffic congestion and a heavy accident toll. The need for adequate highways is urgent if growth of the total economy is not to be impeded. iii. The Government, however, is acutely aware of highway needs. In September 1976, the eight Republics and Autonomous Provinces reached a Social Agreement for the construction/improvement of about 1230 km of the most urgently needed main roads during the period 1976-80; the road sections included in this proposed project are of the highest priority in that agreed list of roads. iv. The proposed project would provide for road construction in three Republics and one Autonomous Province. In two cases the capacity of the existing highway would be doubled by adding a second carriageway: in another case, to avoid the local congestion of ribbon-development, the first two-lane carriageway of a later four-lane highway would be built on a new alignment away from the existing road; and for the fourth section a new secondary high- way would be built completing a link between two major centers, and opening for development an area hitherto inaccessible by vehicle except for brief periods of the year. v. Transport coordination has long been a concept which the Bank has sought to promote in Yugoslavia. However, because of the devolution of responsibility for decision-making in transport affairs from the Federal Government to Republics and Provinces, still to continue further to Communes and Enterprises, the goal of adequate inter-modal coordination would appear to have become correspondingly more difficult to achieve. Despite the seeming difficulties, a willingness has emerged for the Republican and Provincial Authorities to meet to discuss matters of common interest. For highways, the forum has been the Council of Republican and Provincial Road Organizations, where matters such as highway design standards, common approaches to technical - ii - and economic studies are discussed and agreed. Up to the present the Council has no executive authority and is advisory only, but its role is currently being reviewed and it may emerge as a more authoritative body for country-wide highway affairs. The Council has its counterparts in other transport modes. To take advantage of this willingness to cooperate among the Republics and Provinces the proposed project includes a Study of Road-User Charges by consultants which would assist the authorities in reviewing present policies and practical problems concerning the level of Road-User Charges, and their distribution to meet road infrastructure costs. A similar Study on Rail Costs is also included. These two studies could provide the basis for a road/rail coordination policy. The proposed project also provides for technical assis- tance to the Autonomous Province of Kosovo in the preparation of an integrated highway development program. Such a program might well be the basis of a future Bank highway sector loan to this economically less developed region of Yugoslavia. vi. The proposed Bank loan would be made to the Association of Enter- prises for Roads of the Socialist Republic of Serbia, the Republic Community for Roads, Sarajevo, Bosnia-Herzegovina, the Socialist Republic of Macedonia, and the Self-MIanaging Community of Interest for Arterial and Regional Roads of the Socialist Autonomous Province of Kosovo. Each Roads Organization would be responsible for executing the construction of the project roads within its jurisdiction; the Federal Committee for Transport will be responsible for co- ordinating the execution of the road and rail studies by the Council of Road Organizations and Community of Yugoslav Railways respectively and the Community of Interest for Roads in Kosovo would be responsible for preparing the highway development program for the Province. The respective Governments would give a guarantee for the financing of total project costs including possible cost overruns, while the Federal Government would guarantee the loan. vii. The Council of Republican and Provincial Road Organizations would act as fiscal agent for the project and as coordinator in project matters to the Bank. Construction contracts based on unit prices would be awarded after international competitive bidding in accordance with the Bank's "Guidelines for Procurement", among prequalified contractors. Prequalification procedures according to Bank Guidelines for all the construction subprojects are expected tc be completed by mid-April 1977. viii. The project was appraised during September 1976. The beneficiaries of the project would come from a wide range of sectors and income groups due to the diversity of traffic using the highways. Savings in vehicle operating costs would constitute 35% to 80% of the total benefits for different project roads. ix. The economic benefits attributed to the project road improvements take into account only savings in vehicle operating costs, passenger time and road maintenance costs. The proposed investments on the road sections would produce economic returns ranging from 15% to 62%. The weighted average economic return of all civil works components, which account for 99.7% of total project cost, is 23%. - iii - x. Sensitivity tests were made on the assumption of a 15% increase in construction costs combined with a 15% decrease in users' cost savings. Even under these unfavorable assumptions, the economic returns would range fromn 11% to 45%, with an overall economic return of 18%. xi. On the above basis and subject to the conditions of effectiveness, the proposed project would be suitable for a Bank loan of US$56.0 million to the Road Organizations of Serbia, Bosnia-Herzegovina and Kosovo and the Republic of Macedonia for a 15-year term including a grace period of 3 years. APPRAISAL OF Al EIGHTH HIGHWAY PROJECT YUGOSLAVIA I. INTRODUCTION 1.01 The Socialist Federal Republic of Yugoslavia has asked the Bank to help finance a project comprising the construction of about 130 km of main highway (about 80 km of which being two sections of Yugoslavia's Trans- Yugoslav Highway) in the Republics of Serbia, Bosnia-Herzegovina and Macedonia, and the Autonomous Province of Kosovo, and studies by consultants of road-user charges and rail costs in Yugoslavia, as well as technical assistance in the preparation of a highway master plan for Kosovo. Construction of the project road sections was proposed by the authorities as being of the highest priority within their five-year highway plans. Feasibility studies for the project roads were carried out by Yugoslav consulting firms and design institutes in accordance with the "Guidelines for Highway Feasibility Studies", prepared by consultants under the Bank's Fifth and Sixth Highway Projects. Final designs of the project roads were carried out by the same agencies assisted by the institutes for soil mechanics, geology and civil engineering. 1.02 The total project cost is estimated at US$179.0 million with a foreign exchange component of US$56.0 million, the proposed loan amount. 1.03 This report has been prepared on the basis of information provided by the Yugoslav authorities and their consultants, and on the findings of an appraisal mission, comprising Messrs. R. Mulligan (Engineer), and M. Ganguli (Economist), which visited Yugoslavia during September 1976. TI. THE TRANiSPORT SECTOR A. Effects of Geography and Economic Growth on Transport 2.01 Yugoslavia has an area of about 255,800 sq km. Its population of about 21 million is growing at a rate of O.9% per annum. The country's topography has largely influenced the shape of the transport system. Major national and international routes traverse in a northwest-southeast direction avoiding the crossings of the rugged coastal and southern mountains. The northern part of the country is better served than the southern part for historical reasons. 2.02 Yugoslavia's location makes it an important crossroads of Europe. The trunk routes and international connections are of special concern because Yugoslavia has borders with seven countries. Traditionally, the Yugoslav transport system has provided access to the sea for a number of central European countries. Several international land connections, particularly - 2 - with Italy and Austria, have acquired special significance for foreign tourism. The Trans-Yugoslav Highway (TYH) and railway corridor, spanning Yugoslavia from its Italian and Austrian borders in the northwest to Bulgaria and Greece in the southeast, is the shortest route linking Europe with the Near and Middle East and has become a major transit route. This corridor is the backbone of Yugoslavia's transport network and serves some of the country's major areas of high industrial and commercial activity. Since early 1976, and as part of its normal transportation project and sector activities in Yugoslavia, the Bank has been discussing the development of the TYH corridor with the Government. 2.03 Yugoslavia's diversified economy has grown rapidly since World War II. During the past decade, per capita income has grown by about 6% per annum to reach about US$1,480 in 1975. Rising economic activity and per- sonal incomes led to a rapid growth in transport requirements. Between 1964 and 1974, total freight traffic grew at about 9% per annum (Table 1) and total passenger traffic by about 13% per annum (Table 2). B. The Transport System 2.04 The transport system in Yugoslavia is well diversified. At the beginning of 1975, Yugoslavia had 98,372 km of roads, 10,300 km of rail lines, 7 main ports and 15 airports (10 of which handle international flights) and a sizeable network of inland and coastal waterways. Pipelines have come into increasing use in recent years. 2.05 The growth of traffic by different modes has been rather uneven. Between 1964 and 1974 the freight traffic (ton-km) on railways increased by about 2% per annum compared to an increase of about 18% per annum on highways. The passenger traffic on railways declined by about 2% per annum during the same period in contrast with an increase of about 21% per annum on highways. As a result, road transport has gained in relative importance and has replaced rail transport as the dominant carrier. River transport has retained an important and competitive place, carrying about 9% of total freight traffic. The ports have almost doubled their cargo handling since 1964 and currently move about 21 million tons per annum (Table 3). Several port authorities are contemplating extensive investments; at the Bank's insistence, a port survey was included in an earlier Bank project to provide the framework for further investment in the port sub-sector. 2.06 During the early 1960's transport facilities developed more slowly than other sectors of the economy and accounted for only about 10-11% of total investment, the lowest in Europe. Since then the position has improved some- what, and transport accounts for about 16-18% of the total investments since 1970; but in view of the considerable gaps in the transport infrastructure, the resources devoted to the sector appear to have been insufficient and much still remains to be done. One of the most urgent needs at present facing the transoort sector is modernization of railways, which has been delayed for lack of funds. In this context, Government support rmeasures should be paralleled by improved utilization of railway capacity and extensive marketing and promotional efforts. Also the capacity of some ports needs to be increased, and many roads are still below standard for the traffic they carry and need improvements to handle anticipated traffic efficiently and economically. C. Transport Policy, Planning and Coordination 2.07 There is as yet no overall clearly stated and well-defined transport policy. However, the basic rationale for such a policy has been implicit in the country's main economic principles; free choice by users and competition in a market economy among autonomous transport enterprises. Recently, with a view to creating the necessary conditions for integrated development of trans- port, the Federation, the Republics and the Autonomous Provinces have mutually agreed to establish a long-term transport policy for the country. Considerable progress has been made in this direction, and the authorities are in the process of negotiating social agreements on the various aspects of future transport policy. 2.08 Decentralization of decision making, initially to Republics and Provinces and as now envisaged, to Communes and Enterprises, resulted in a large measure of autonomy being enjoyed by such transport agencies. This extension of autonomy to the "grass-root" agencies and transport organizations would increase the number of decision-making bodies, and make the country-wide transport planning and co-ordination (especially between road and rail) more difficult. 2.09 The Yugoslav authorities are acutely aware of the need for estab- lishing a satisfactory institutional framework within which various trans- port agencies and enterprises can collaborate effectively. The Bank played a useful role in this context in: (i) the establishment of the Federal Committee (originally a Secretariat) for Transport and Communications; (ii) the establishment of the Secretariats or Committees for Transport in most Republics and Provinces; (iii) the establishment of the Council of Republican and Provincial Roads Organization (CRO); and (iv) strengthening the Community of Yugoslav Railways (CYR). 2.10 In the Yugoslav political system these institutions are essentially advisory. With decision-making so decentralized, the main thrust for better coordination must necessarily originate voluntarily from the various transport enterprises and the Republics and Provinces. A tangible manifestation of - 4 - their willingness to work together is the formation of associations among enterprises in the various sub-sectors which provide varying degrees of coordination. For example, the CRO, established by the various road organiza- tions in the Republics and Provinces in 1971, has been active in the nationwide standardization of engineering and design criteria, data collection and other technical matters. Under recent agreements the five inter-dependent railway enterprises have delegated to CYR increased responsibilities for planning, coordination, research and marketing. In addition to financing highway projects of high priority, the Bank has tried to encourage the Yugoslavs to develop the mechanisms for coordination. Progress in this direction has been s-Low, partly because Government's political philosophies emphasize devolution of authority and decentralization of decision-making to the Republics and Provinces, with diminishing responsibilities of the Federal administration. However, there is encouraging evidence of the willingness for cooperation - one example in context is the joint approach of the concerned administrations to solving the problems of the Trans-Yugoslav highway in a planned and logical manner. 2.11 Further improvements are still needed, however; in its forthcoming Social Agreement on Economic and Other Measures, the Government needs to define its transport policies more precisely and delineate more clearly the responsibilities of the Federal, Republican and Provincial governments and the Communities of Interest in the transport sector, including possibly giving the CRO a legal status with authority to play a more effective role in highway matters. Fuel policies in relation to transport development should also be clearly stated. The Government may well wish to balance the need for economic development, in which transport plays a vital part, against its desire to substitute other sources of energy for oil, of which transport is the prin- cipal user. Also, to promote transport coordination more effectively, the need is becoming increasingly pressing for studies on road user charges and on railway costs to ascertain and eventually eliminate overt and hidden subsidies or cross-subsidies. At present the Yugoslav railways are facing mounting deficits which the administrations wish to meet from various subsidies, in- cluding one on infrastructure costs. The justification claimed is that road users, particularly the operators of heavy diesel trucks, do not pay their full share of these costs. The Bank has no evidence that road users do not pay their full share, but because diesel fuel is taxed much less (about half) than gasoline, cross-subsidies may favor the operation of heavy diesel trucks - the vehicles which cause most damage to the roads. 2.12 The proposed project includes as an important component, therefore, a Study of Road-User Charges, brief details of which are given in Annex 1. A Study of Rail Costs is also being included (brief details of which are given in Annex 2). Both studies are expected to provide a firm basis for the efficient and economic utilization and coordination of transport facilities; their concurrent timing, however, is important if the transport coordination issues are to be addressed effectively. The timing of completion of both studies would permit the inclusion in a possible future Highway Project of - 5 - a comprehensive road/rail coordination study whose major input would be the findings of the two modal studies. In addition, the proposed project provides technical assistance to the Autonomous Province of Kosovo in the preparation of a highway master plan with investment priorities ranked on economic cri- teria. Brief details of the study scope are given in Annex 3. 2.13 In the past the Bank's main objectives in Yugoslavia's transport sector have been the development of the basic infrastructure and the local skills needed to operate the modal institutions. Under the Third and Fourth Highway Loans the laws and decrees related to the highway subsector were reviewed, the organizations for road maintenance and their operations were overhauled and improved; traffic counting, which earlier had been rudimentary, was carried out on a systematic and planned basis. Subsequent highway loans provided technical assistance in the formulation of standardized guidelines for the preparation of feasibility studies. The results of this technical assistance are now abundantly evident in the high quality of project prep- aration. 2.14 The thrust of future transport sector lending will be to consolidate progress in institutional development and to foster inter-modal coordination. The technical assistance under this proposed Eighth Highway Project to Kosovo for the preparation of a highway master plan could well provide the stepping stone to a new dimension in the Bank's lending to Yugoslavia by providing the basis for a possible future sector loan in highways to that economically less developed region. D. Previous Projects 2.15 The project would be the fifteenth for the transport sector as a whole and the eighth for highways. Total Bank lending for the transport sector amounts to US$620.4 million, including US$220 million for seven high- ways, US$108.4 million for two pipeline projects, US$248 million for four railway projects and US$44 million for the Bar Port Project. Out of the seven highway projects, four have been successfully completed so far, and the remaining projects are well in hand. Government's execution of the highway projects has been generally satisfactory. Brief details of all transport projects are in Annex 4. III. THE HIGHWAYS A. The Network 3.01 At the beginning of 1975, Yugoslavia had about 98,400 km of roads, of which about 35,400 km were paved. The rapid development of the paved net- work began in the early 1960's when only about 9,000 km of paved roads were open to traffic; since then the paved length has increased fourfold (Tables 4 and 5). - 6 - 3.02 Ilowever, despite its rapid development in the last decade, the paved network is still inadequate to meet the needs of traffic growth (2.05). Large sections of the main highway arteries, particularly of the TYH, are heavily congested and are in need of upgrading to provide greater capacity. Several roads alreadv paved have foundations and other design features inadequate for the traffic loads they carry. I4any gravel roads are carrying relatively high volumes of traffic and are becoming inadequate for the needs of modern motor traffic, necessitating their reconstruction to paved standards. 3.03 Thle highway network is divided into four administrative classes: Class I roads connecting the Republics, Provinces or important commercial and industrial centers; Class II roads interconnecting regions within R1epublics or Provinces; Class III roads serving Communes within the regions; and Class IV roads which are local roads (Table 4). The Federal Government determines which roads in the network should be Class I roads; these in- clude roads of the European network ("E" roads); the Republics and Provinces are responsible for the construction and upkeep of the Class I network, but themselves decide which roads should be included and maintained in the Class [I and III network. The Comrnunes are responsible for the Class IV roads. B. Traffic 3,04 Road transport has developed rapidly and the vehicle fleet has g-rown from about 125,000 in 1958 to about 1,726,000 in 1974 (Table 6). Between 1966 and 1974 the registration of passenger cars increased fivefold and trucks and buses doubled. Hlost of the increase in the vehicle fleet was supplied by domestic production. Private car ownership is steadily rising as per capita incomes grow. The trucking industry is highly competitive. Motorization in the different regions of the country, however, varies widely in line with their state of development: Slovenia, the most developed has seven inhabitants per car; Kosovo, the least developed, has about 100 in- habitants per car. C. Administration 3.05 Highway administration in Yugoslavia is decentralized and con- centrated in the Republics and Provinces. The Federal Government's role is restricted to general policy and regulatory matters such as regulations on vehicle dimensions, axle loading and road safety aspects and the international aspects of highway administration and road transport. 3.06 At the Republican and Provincial levels, responsibility for highway administration lies with the Republican or Provincial Road Organizations. These organizations are governed by "Boards" comprising relatively large numbers of members of various interest groups such as transport companies, industrial enterprises, agricultural cooperatives and professional and road user organi- zations. The members elect Executive Boards which are responsible for day- to-day administration and preparation of highway proposals, which are co- ordinated through the planning system with the plans of other sectors and need the approval of Republican or Provincial Governments. Purely local roads are under the jurisdiction of the local communities whiich have special departments. In cities, the City Planning Authorities are giving increasing attention to urban transport impact with a view to rationalizing the use of transport facilities. 3.07 Coordination among the Road Organizations is provided through the Republican and Provincial Assemblies, the Federal Committee for Transport and Communications and the CRO. 3.08 The organization of highway administration has changed repeatedly during the postwar years. At present, for example, the physical planning and administration of the road plans of Macedonia are handled by the Republican Road Council, which replaced the Republican Road Fund about two years ago. The Council is governed by a board of members and is headed by a Secretary (Annex 5), aided by a professional staff of 22 engineers, 3 economists, 4 lawyers and various technicians. This organization is expected to evolve further and to become an "Association for the Communities of Interest for Roads." The Communities of Interest, it is understood, would further promote increased citizen and user organization participation in the decision-making process. It should be recognized, however, that the organization of the highway sub-sector is complex, that the highway administration is still in a period of transition as a result of the continuous decentralization process, and no firm long-term plans on highway investment are as yet available. Although these conditions are not entirely conducive to a sector-lending approach by the Bank at this stage, technical assistance is being included under the presently proposed project whereby the economically less developed region of Kosovo would be helped to prepare a highway master plan which might form the basis of a future Bank Sector Loan. D. Planning 3.09 Five-Year Highway Plans are prepared by the Road Organizations, coordinated with the plans for other sectors by the Republican or Provincial Planning Organizations and approved by the Republican or Provincial Assemblies. The new plans for 1976-80 are almost ready for finalization by the assemblies. Inter-Republican roads are planned on the basis of agreements among the respective Governments. 3.10 Although no problems have arisen in these connections in recent projects, during loan negotiations assurances were obtained from the Borrowers that they will continue to collect and record such technical economic and financial data as shall be reasonable for the proper planning of the highway network, and continue to ensure that the dimensions and axle loads of vehicles using the roads shall not exceed the design limits of the roads. - 8 - 3.11 Recently, a study has been initiated under the aegis of CRO to assist the authorities in preparing Investment, Financing, and Action Plans for improving the TYH. In this context, a Social Agreement has already been reached amongst the Federation, Republics and Autonomous Provinces for the development of the TYH as well as certain other major roads during 1976-80. This Agreement also commits the Republics and Provinces to mobilize the required resources, a demonstration that the mechanism for country-wide planning, coordination and cooperation does exist. E. Investment and Financing :3.12 Overall highway expenditures for new construction and upgrading in 1974 amounted to about 77% of total highway expenditures (US$315 million equivalent), with the remaining 23% earmarked for highway maintenance (Table 7). Highway expenditures have increased steadily over the last decade (Table 3). However, inflation eroded a substantial portion of the increased outlay and in real terms the highway expenditures did not keep pace with the rapid growth of highway traffic (2.05). 3.13 The Federal Government's role in highway financing has been phasing out since 1970, when it was decided that the Federation should cease its par- ticipation and only carry out obligations under previous commitments. In 1974, the Federal Government's remaining contribution to highway financing was only about 4% of the total expenditure. The main source for highway financing is the revenue from taxes on gasoline and diesel oil, license fees as well as the revenues from taxes paid by foreign motorists on entering Yugoslavia. In 1974 these revenues yielded about Din 6.0 billion (US$0.33 billion); in the same year expenditures on construction and maintenance of the highway system totalled Din 5.6 billion (US$0.31 billion). About 41% of these revenues were earmarked in 1974 for highway maintenance and improvement. These earmarked revenues provided about 44% of the total expenditures in 1974 for highway construction and maintenance (Table 9). The balance was made up of IBRD and domestic loans (24%), the Fund for Less Developed Regions (4%), contributions by the Federal Government (4%), contributions by the Republics, Provinces, Communes (23%) and other sources (1%). Since the earmarked reve- nues cover only about 44% of the total expenditures, the road development plans of the Road Organizations depend heavily on budgetary allocations, public loans, bank credits, and voluntary contributions of enterprises and citizens. 3.14 Expenditures for highway maintenance in 1974 amounted to about Din 27,900 (about US$1,550) per km for the highway network maintained by the Republics and Provinces. The satisfactory standard of road maintenance in Yugoslavia indicates that adequate amounts have been made available during the last few years. - 9 - F. Engineering 3.15 Preinvestment studies of highway projects may be commissioned by the Road Organizations from either local or foreign consulting firms and, in general, are very satisfactorily executed. The subsequent design of the proj- ects and the supervision of their construction is usually performed, also very satisfactorily, by the Road Organizations who may enlist the support of com- petent Yugoslav consulting engineers and technical institutes. G. Construction 3.16 Road construction and improvement is normally executed by means of unit-price contracts. As a rule, participation in bidding for locally financed projects is limited to the domestic contracting industry, which is capable, highly competitive, and sufficiently aggressive to have won several contract awards outside Yugoslavia. Bidding for Bank-financed projects, however, is subject to international competitive bidding in accordance with the Bank's "Guidelines for Procurement"; such bidding for past highway proj- ects, however, has resulted in the participation as a joint-venture partner of one foreign contractor only, an indication of the competitive edge the local industry has on its own ground. Quality of construction work is generally of a high standard. H1. Maintenance 3.17 Road maintenance is carried out on the basis of yearly contracts negotiated between the Road Maintenance Enterprises and the Road Organiza- tions. The Maintenance Enterprises are deployed widely in each Republic or Province, enabling prompt and effective maintenance to be carried out. The standard of road maintenance is satisfactory (3.14). However, during loan negotiations assurances were obtained from each of the Borrowers that it will continue to ensure that all roads falling within its jurisdiction will be adequately maintained in accordance with sound engineering and financial practices, and that funds, facilities, services and other resources required therefore will be provided promptly, as needed. IV. THE PROJECT A. Objectives 4.01 The burgeoning growth of Yugoslavia's motor vehicle fleet in recent years has brought into sharp relief the inadequacies of the highway network in general. The worst effects, however, are evidenced in the primary system. - 10 - Some of the many highway sections where design standards are deficient are now carrying such heavy traffic volumes that serious congestion results and the accident toll is heavy. The proposed project addresses this core problem by the selection for construction of three road sections where the traffic pro- bLems are presently identified as being the most vexing. 4.02 The needs of the secondary and rural road networks are also impor- tant, but are not of the same urgency or magnitude as those of the primary system. However, the construction of one secondary road selected for in- clusion in the proposed project would solve some pressing sccial problems and provide a catalyst for development within its zone of influence as well as affording sizeable distance savings for through traffic. For these reasons, its construction would generate large tangible and many intangible benefits, despite comparatively low forecast traffic volumes. 4.03 As a significant step towards achieving inter-modal transport coordination the proposed project includes a Study of Road-User Costs by consultants. The results of this Study should assist the authorities in re- viewing the policies and the practical problems concerning the levying and the level of road-user charges and their allocation to meet the costs of road infrastructure. Concurrently with the foregoing study, the proposed project also includes a Study of Rail Costs. Both studies are complementary and their findings will form a basis for developing a national policy framework for the major transport modes. 4.04 The provision of technical assistance to Kosovo will help this economically less developed region prepare a highway master plan which would not only define clearly the development objectives of the Province ranked on the basis of economic criteria, but might also serve as the possible vehicle for a future Bank sector loan in highways to the Province. B. Description 4.05 The project comprises: (a) the construction of the following highway sections, identified in the 1976-80 Development Plan as having the highest priority in the respective Republics and Provinces (Map IBRD 1082R1): (i) in the Republic of Serbia, two additional traffic lanes to, and the reconstruction of the existing two-lane limited access highway from Mali Pozarevac to Ralja (28 km); (ii) in the Repubic of Macedonia two additional traffic lanes to the limited access main highway between Kumanovo and Titov Veles including a bypass of Skopje city (52.7 km); - 11 - (iii) in the Autonomous Province of Kosovo and for a short distance in the Republic of Serbia, a new two-lane paved road along the approximate alignment of an old earth road between Pristina, Makovac and Petrilja on the Pristina-Leskovac route (40.0 km); and (iv) in the Republic of Bosnia-Herzegovina, two-lanes as the first phase of an ultimate four-lane divided highway with limited access between Banja Luka and Klasnice (9.3 km). (b) studies by consultants of: (i) Road-User Charges in Yugoslavia; (ii) Rail Costs in Yugoslavia; and (iii) the highway sector in Kosovo leading to the preparation of a highway master plan. Road Construction 4.06 Brief descriptions of the project road sections follow. For detailed descriptions of the project roads, see Annex 6. Serbia: Mali Pozarevac-Ralja Road 4.07 This road section was previously proposed for financing under the Seventh Highway Project, but was withdrawn from the project because its con- struction could not be accommodated within the loan amount. As well as being an important section of Yugoslavia's primary road network it is part of the TYH. The road is heavily congested and the addition of two new traffic lanes is urgently needed. The existing two-lane pavement is distressed and in poor condition; provision for its reconstruction is therefore included in the proposed project. Macedonia: Kumanovo-Titov Veles road 4.08 Like the Mali Pozarevac to Ralja highway in Serbia, this road section is also part of the TYH. Unlike the Serbian road section, however, the existing two-lane limited access highway is in reasonably good condition except in a few places where there are pavement failures. To provide addi- tional capacity for present traffic and projected traffic growth, the proposed project provides for the construction of two additional traffic lanes and a bypass of Skopje city; the project also includes limited rehabilitation works on the existing road to correct pavement failures. Kosovo and Serbia: Pristina-Leskovac Road 4.09 Of this 102 km secondary route, about 62 km are paved, the remain- ing 40 km (mainly in Kosovo, but with a short section in Serbia) from Pristina - 12 - to Makovac (10 km from Pristina) to Petrilja are gravel/earth in very poor condition. Barely passable in dry weather, the road is impracticable for slotor vehicles for much of the year. The proposed project provides for the construction to two-lane paved standards of the unpaved 40 km, on substan- tially the same general alignment as the old road. 4.10 About 17 km north of Pristina, on the main road to Belgrade, another gravel/earth road links to the project road at Tulare. Similar to the 40 km section proposed for construction under the project, this road is also in poor condition, and few vehicles use it. However, if it were improved, it would provide an alternative link between Pristina and Leskovac some 14 km longer than the proposed project road. There is insufficient traffic to warrant construction of both roads. Therefore, to preserve the benefits deriving from the proposed project road construction, the Provincial Covernment concerned should defer substantial improvement to the other route until such time as the investment would be clearly justified economically. During loan negotiations, the Borrower's agreement was obtained to such a proposal. Bosnia-Herzegovina: Banja Luka-Klasnice Road 4.11 The road from Okucani on the TYH to Banja Luka and onwards to Vakuf, Jablanica and the Adriatic is one of Yugoslavia's principal north/south routes as well as one of the principal accesses from the north to the Republic of Bosnia-Herzegovina. The link between Banja Luka and Okucani is already carry- ing a near capacity traffic load, but the Banja Luka-Klasnice section proposed for construction under this project is the most congested, a situation exacer- bated by ribbon-development and slow moving local traffic. Accordingly, the project provides for a new limited access two-lane highway from Banja Luka to Okucani on a new alignment to the west of the existing road. The existing road will then cater mainly to local traffic. The authorities intend control- ling land development along the new route so that the problems of the existing road are not repeated. Assurances to this effect were obtained from the Borrower during loan negotiations. Road-User Charge Study 4.12 The proposed project includes a Road-User Charge Study to be under- taken by consultants. The Study would examine the fiscal, economic and admin- istrative aspects of the present system of levying road-user charges, taxing vehicles, and allocating resources to the highway sub-sector in Yugoslavia, make recommendations concerning appropriate pricing policies and systems for levying road-user charges to achieve an optimal economic utilization of present and proposed road facilities (Annex 1). Rail Costs Study 4.13 The proposed Rail Costs Study would establish a cost-accounting system and recommend steps needed to determine the costs of providing all railway services, broken down into principal commodity flows and inter-city -13 - and commuter passenger services. The system recommended would provide rail- way management with the data needed to analyze on a continuing basis the relationships between tariffs and costs and cost control. The Study would be carried out in two phases (Annex 2). Technical Assistance 4.14 The proposed project also provides technical assistance to the Autonomous Province of Kosovo in the preparation of a highway master plan for that province (Annex 3). The study would provide a detailed investment program for the period 1978-80, with proposed projects ranked according to economic criteria, and an outline investment program for the period 1981-85. 4.15 There is adequate expertise available locally to execute much of the work needed for the foregoing three studies. However, so that particular expertise may be called on for certain specialist tasks, the project provides for about 40 man-months of consultants' services. C. Engineering 4.16 Engineering, according to the design standards of Table 10, which are satisfactory, has been carried out by competent Yugoslav engineering consulting firms and by 'institutes for geology, soil mechanics and civil engineering. - 14 - D. COST ESTIMATES 4.17 The estimated costs of the project are as follows: Estimated Costs - Dinar (Million) US$ (Million) Foreign Project Component Local Foreign Total Local Foreign Total Exchange I. Road Construction (a) Serbia Mali Pozarevac-Ralja (28 km) 5T6.59 260.81 787.40 29.26 14.49 43.75 33.1 (b) Macedonia Kumanovo-Titov Veles (52.7 km) 704.27 284.21 988.48 39.13 15.79 54.92 28.8 (c) Bosnia-Herzegovina Banja Luka-Klasnice (9.5 km) 154.70 85.14 239.84 8.60 4.73 13.33 35.5 (d) Kosovo Pristina-Leskovac (40 km) 108.09 51.80 159.89 6.00 2.88 8.88 32.4 Total for Construction 1,493.65 681.96 2,175.61 82.99 37.89 120.88 31.3 Contingencies: Physical 10% 149.37 68.19 217.56 8.30 3.79 12.09 Escalation 2 559.70 252.81 812.51 31.11 14.04 45.15 Total I 2,202.72 1,002.96 3,205.68 122.40 55.72 178.12 II. Consultants' Services to Provide: (a) A study of road-user charges3/ 1.00 2.20 3.20 0.06 0.12 0.18 67 (b) A study of rail costs 4/ 0.00 0.00 0.00 0.00 0.00 0.00 0 (c) Technical assistance in 3/ highway planning for Kosovo - 1.00 2.20 3.20 0.06 0.13 0.19 67 Total 2.00 4.40 6.40 0.12 0.25 0.37 67 Contingencies (10%) 0.20 0.44 0.64 0.01 0.03 0.04 67 Total II (with contingencies) 2.20 4.84 7.04 0.13 0.28 0.41 67 Totals I and II (excluding 1,495.65 686.36 2,182.01 83.11 38.14 121.25 31.5 contingencies) Contingencies: Physical 149.37 68.19 217.56 8.30 3.79 12.09 Escalation 559.90 253.25 813.15 31.12 14.07 45.19 Totals I and II (with contingencies) 2,204.92 1,007.80 3,212.72 122.53 56.00 178.53 Tot:als (Rounded) 2,205.00 1,010.00 3,215.00 123.00 56.00 179.00 31.3 1/ Excluldes costs of land acquisition, final design and supervision of construction which are met in toto by Government, but includes approximately 12% taxes. 2/ Construction cost estimates are as of July 1, 1976. Escalation, assumed at 13% for 1976 and 12% for years 1977--79, is the same for both local and foreign costs. In line with construction periods shown in Annex7 , price escaLation for Serbia is 33%, for Macedonia 42%, for Bosnia 38%, and for Kosovo 29%. 3! Loca:L costs of foreign consultants only are included. 4/ Study will be financed by Yugoslavia but will remain part of the Project. During loan negotiations, the project cost estimates were discussed and confirmed with the Borrowers. - 15 - 4.18 Construction cost estimates are based on quantities from the final design and on unit rates; the costs of consulting services are based on the estimated number of man-months required at US$6,000/man-month, which include all overheads. 4.19 A 10% physical contingency has been included to allow for unforeseen quantity increases in the road construction works. Price escalation for con- struction costs has been calculated using annual rates of 13% for 1976 and 12% for 1977-79, and has been assumed the same for both local and foreign costs. The price escalation of consulting services has been calculated using a factor of 10% for both foreign and local costs. 4.20 The fcreign exchange component is estimated at US$56.0 million, based on the assumption that, as in the past, local contractors will win the awards of construction contracts after international competitive bidding. E. Financing 4.21 The proposed loan of US$56.0 million corresponds to the foreign exchange component of the project (31.3% of total costs); local costs amount- ing to US$123.0 million will be borne by the Republics of Serbia, Bosnia- Herzegovina, Macedonia, the Autonomous Province of Kosovo. A condition of effectiveness of the proposed loan would be that the Republics of Serbia, Bosnia-Herzegovina, Macedonia, and the Autonomous Province of Kosovo and the Commune of Pristina will have adopted the legal authority authorizing the construction of their respective road sections. 4.22 For the construction components of the proposed project, the loan would be made to the Association of Enterprises for Roads of the Socialist Republic of Serbia, the Republic Community for Roads, Sarajevo, the Socialist Republic of Macedonia, and the Self-Managing Community of Interest for Arterial and Regional Roads of the Socialist Autonomous Province of Kosovo. A condition of effectiveness would be that the Governments of the participating Republics and of the Autonomous Province of Kosovo will have approved a guarantee to cover the financing of their respective sections of the project roads, in- cluding possible cost overruns. Although the concerned Road Organizations and the Republic of Mlacedonia will be the Borrowers for the Road-User Charge Study, during loan negotiations it was agreed that the Government of Yugoslavia would meet the full costs of the Rail Costs Study, which remains part of the project. The Self-Managing Community of Interest for Roads of Kosovo will be the Borrower for the Highway Master Plan of that province. 4.23 Although they have not indicated their intention of so doing, Serbia and Macedonia may wish to operate their respective highway sections as toll roads, as some Republics have done for road sections financed under the Third, Fifth and possibly Seventh Highway Projects. It was agreed under those earlier projects that if they were to be imposed, tolls would be applied flexibly and at such levels as not to divert an unduly large portion - 16 - of through traffic to the alternative toll-free facilities or means of trans- portation. The Performance Audit Report (No. 1385) of December 10, 1976, dealing with the Third Highway Project (Loan 608-YU) in Yugoslavia also cautions against setting tolls at such a high level as to discourage potential traffic. During loan negotiations the Borrowers agreed to the same principle applying to the highway sections financed under the proposed project. 4.24 The Road Organizations of the four Borrowers have all participated satisfactorily in earlier Bank highway projects. Each entity executes effi- ciently its annual work programs approved by its Republican or Provincial Assembly. F. Implementation Responsibility for Implementation and Supervision 4.25 The Road Organizations of the three participating Republics and the Autonomous Province of Kosovo would be responsible for executing their respective construction works. In the case of the Pristina-Leskovac road, part of which falls in Serbia, the Community of Interest for Roads for Kosovo would be the executing agency for the project road in its entirety. This organization would also administer the construction work within the Commune of Pristina on behalf of that authority. The concerned Republican and Pro- vincial Governments' agreement to these arrangements has been notified to the Bank, but their formal agreement to this effect would be a Condition of Effectiveness of the proposed loan. As for previous highway projects where these arrangements worked satisfactorily, supervision of the construction work would be effected by the Road Organizations themselves assisted by the Yugoslav consulting engineers and technical institutes which designed the project roads. As was the case in the Seventh Highway Project, the CRO would again act as fiscal agent for the project, coordinator of disbursement requests on the Bank, and act as liaison agent between the Republics, Provinces and the Bank on project-related matters. A condition of Loan effectiveness would be that the concerned Republics and Province will have delegated authority to CRO to undertake these obligations. 4.26 The Federal Committee for Transport and Communications would be responsible for coordinating the execution of the Road-User Charge and the Rail Cost Studies by CRO and CYR respectively (4.22). The Community of Interest for Roads of Kosovo would be responsible for executing the Highway Master Plan for that Province. Procurement 4.27 Construction contracts based on unit prices would be awarded after international competitive bidding in accordance with the Bank's "Guidelines for Procurement." Contracts would be of such a size as to permit maximum participation of the local industry, allowing firms to bid for one or more - 17 - sections up to their prequalified capacity. Contractors would be prequali- fied for the works and prequalification procedures began in February 1977. Bids for the contracts would be invited in April 1977 leading to contract awards to the lowest evaluated bidders in June/July 1977. Contracts will include satisfactory price escalation clauses. Right-of-Way Acquisition 4.28 The concerned Republican and Provincial Governments are at present acquiring the land needed to build the project roads. On some earlier projects land acquisition problems have delayed implementation; on others the problems have been sufficiently serious to necessitate realignments of the project roads. Although no major difficulties are foreseen for the proposed project, assurances were obtained from the Borrowers during loan negotiations that they will make available all right-of-way as needed for the timely implementation of the project. 4.29 Proposals from suitably qualified consulting firms acceptable to the Bank according to conditions and Terms of Reference satisfactory to the Bank would be invited and contracts signed before September 30, 1977, for the execution of the Road-User Charge and Rail Costs Studies and for the prepara- tion of the Kosovo Highway Master Plan. Assurances were obtained from the Borrowers that they will invite proposals for the Studies from suitably qualified consultants, and discuss and agree their evaluations and proposals for contract award with the Bank before awarding the contracts for the Studies. No later than June 30, 1979, they will discuss and agree with the Bank on implementation of the findings of these Studies. Project Implementation Schedule 4.30 The construction contracts in Kosovo should be completed in early 1979, in Serbia and Bosnia-Herzegovina in late 1979, and in Macedonia in late 1980. The Road-User Charge Study should be completed towards the end of 1978, the Highway M4aster Plan for Kosovo about mid-1978, and the Rail Costs Study about mid-1979. The Project Implementation Schedule (Annex 7) was discussed and confirmed with Government at loan negotiations. G. Disbursements 4.31 The proceeds of the loan would finance the foreign exchange compo- nent of project costs amounting to 33% of the works in Serbia, 29% of the works in Macedonia, 32% of the works in Kosovo and 36% of the works in Bosnia- Herzegovina as well as the foreign exchange costs of the Road-User Charge Study and the technical assistance to Kosovo. During negotiations it was confirmed that the Government of Yugoslavia would bear all costs, including the limited foreign exchange required, for the Rail Cost Study. 4.32 Based on the loan becoming effective by July 1977 a schedule of cumulative disbursements has been estimated and is shown at Annex 8. This schedule was discussed and confirmed with the Government during loan nego- tiations. - 18 - H. Environmental Impact 4. 33 The addition under the project of two new traffic lanes to the existing roads in Serbia and Macedonia will entail only minimal disturbance to land-holders as there is little habitation along either existing road. To the extent that traffic congestion on these two sections is obviated, reduc- tion in air pollution will result. Where the project roads in Macedonia and Bosnia-Herzegovina offer alternative routes to passing through the city areas of Skopje and Banja Luka to through traffic, the urban environments of these centres will be enhanced by the diversion of this mainly heavy traffic. Vil- lages along the central portion of the Pristina-Leskovac route, isolated for much of the year, will benefit from an improved social environment when the road is made all-weather. V. ECONOMIC EVALUTION A. Main Benefits and Beneficiaries 5.01 The proposed project works in the Republics of Macedonia, Serbia and Bosnia-Herzegovina would provide additional capacity required to accom- modate current and expected increases in traffic and thereby support the further economic development and integration of the regions they serve. The project section in Kosovo would provide a direct all-weather paved road connection between Pristina and Leskovac, two important commercial, adminis- trative and population centers in Kosovo and Serbia respectively; it would also open up some areas along the road which are now isolated for much of the year. 5.02 The principal direct beneficiaries would be road users; they come from a wide range of sectors and income groups due to the diversity of the traffic using the highways. Because of their interregional character, the roads will benefit long distance as well as local traffic0 The beneficiaries will also include foreigners such as international truckers and tourists, stimulating the foreign exchange earning potential for the country as a whole. The important commodities that would be affected by the improved roads are raw arLd processed agricultural goods, construction materials, wood and wood prod- ucts, fuels, chemicals and other manufactured goods. Because the transport enterprises are highly competitive and generally well-managed, it is expected that reductions in transport costs accruing to truckers and other transport intermediaries would be passed on gradually to producers and consumers. 5.03 The studies on Road User Charges and Rail Costs under the proposed project would assist the Government to clarify important transport policy issues (Annexes 1 and 2). The technical assistance in the preparation of a highway master plan for Kosovo would provide the provincial Government with the framework of a highway development program with priorities ranked accord- ing to economic criteria. - 19 - B. Economic Evaluation General 5.04 The conditions and characteristics of the existing project road sections are described in Annex 6. Table 11 indicates present and fore- casted traffic on each of the project sections. The traffic projections are based on past traffic trends, recent origin and destination studies, projections of total production of goods and services and growth of per capita income in the zones of influence. The forecasts take into account normal traffic growth and, wherever appropriate, the additional traffic generated by the proposed project works. Forecast traffic growth on the various project sections ranges from about 3% to 10% per annum, except in the case of the road section in Kosovo. These growth rates are conservative when compared with the trends for the same roads from 1965 to 1975, which fluctuated around 15% per annum. The earlier high growth rate reflects the rapid development of road transport following a more liberal transport policy in the sixties. Up till then Government had emphasized railways as the principal transport mode; now, however Government policy favors the develop- ment of all modes of transport, a climate in which road transport was given a great initial spurt. However, road transport is expected to grow more slowly in the future since it appears that a levelling of freight and pas- senger transport among the competing modes is expected in the next few years. Traffic on the road section in Kosovo is estimated to grow initially about 17% per annum; for the period 1980-2000, the growth rate is estimated to decline to about 4-9% per annum. Iligher growth rate at the initial stage is expected mainly because of the low level of motorization in the influence area, reason- able prospects of generated traffic in agricultural and forest produce and diversion of ore concentrates from highly circuitous road-cum-rail route to a much shorter all road route from Lece mines to MIitrovica. 5.05 The quantified economic benefits attributed to the project road sections consist of savings in vehicle operating costs, passenger time, and road maintenance costs. To take overhead costs into account, time savings were valued at 1.1 times average hourly wage rate of travellers in the in- fluence area for journeys made for business purposes. Since the value of time savings for non-business trips are difficult to establish firmly, they were estimated at one-fourth of average wage rates. Benefits due to increased comfort, convenience and safety have not been considered. 5.06 Savings in transport costs, excluding passenger time savings, account for more than 80% of the total benefits for the road section in Kosovo, and about 35% to 70% in the case of the arterial routes included in the project. The expected unit savings in vehicle operating costs in the opening year of the project roads range between 7-20% for passenger cars and between 6-24% for trucks and truck-trailers (Table 12 ). Savings in transport costs accruing to foreign tourists and foreign truckers have been included as benefits on the grounds that they can be regarded as a stimulus of at least equal value for tourism or the Yugoslav economy in general. However, of all the heavy vehicles using the TYH, only about 4% were foreign, and less than half of these were in transit. - 20 - 5.07 In selecting the proposed investments, several alternative solu- tions were evaluated such as improving or reconstructing the existing road, constructing a new one, construction of the ultimate four lanes by stages and the stage construction of pavements, etc. For each project section, the most economical solution has been adopted. 5.08 Two highway sections included in the proposed project parallel rail- way lines. Because these sections are relatively short, their improvement is not expected to divert any significant volume of traffic from the railways which carry mainly long-distance bulk cargo and passenger traffic. 5.09 Based on the most probable estimates of construction costs, vehicle operating costs, time costs, base-year traffic and traffic growth, the pro- posed investments on the project road sections produce economic returns (E.R.'s) ranging from 15% to 62% (Table 13). ER's are evaluated at domestic prices excluding taxes. Shadow price adjustments for foreign exchange, labor, etc. do not change the results by more than 0.5%. All sections would yield first-year benefits of 10% or more on the proposed investment. The weighted average ER of all the civil works components, which account for 99.7% of total project cost is 23%; this aggregate rate of return excludes the three study components for which no meaningful ER could be estimated. The above economic returns understate the full economic benefits of the project by excluding reductions in accidents and greater comfort and convenience of travelling on thle new and improved roads. To test the effects of possible variations in the above estimates, sensitivity tests were made on the assumption that construc- tion costs would increase by 15% combined with a 15% decrease in users' cost saivings and alternatively with the same decrease in construction costs combined w-ith the same increase in users' cost savings. Even under the above unfavor- able assumptions, the ERs would still range from 11% to 45% and all proposed sections would therefore remain acceptable. Mali-Pozarevac-Ralja Section (S.R. Serbia) 5.10 In 1975 average daily traffic (ADT) was about 11,000; about 30% of which was heavy commercial vehicles. Under existing road conditions, the high proportion of heavy commercial vehicles acts as a great impediment to the smooth flow of traffic, lowers the operating speed and increases traffic hazards (4.07 and Annex 6). Traffic is further expected to grow between 3-9% per annum over a 25-year period, compared to an annual growth rate of 13-15% between 1965-75. Upgrading of the existing two-lane road to divided four-lane slandard would increase the capacity of the road considerably and savings in combined vehicle operating costs and time costs are conservatively estimated to yield an ER of about 24%. Kumanovo-Titov Veles Section (S.R. Macedonia) 5.11 On the average, about 7,000 vehicles per day were operating on this section in 1975. About 30% of this traffic consisted of heavy trucks, truck trailers and buses. Traffic is expected to grow between 4-10% per annum over a 25-year period compared to an annual growth rate of about 12-15% between - 21 - 1965-75. The existing facility is badly congested and inadequate to handle the traffic volumes present and future. The project provides for an additional two-lane carriageway and a bypass of Skopje city (4.08). 5.12 Savings in vehicle operating costs account for 70% of the total benefits. The Skopje bypass would enable through traffic, estimated at about 40-50% of total traffic on the road, to avoid the congested city center. Moreover, it would also reduce the journey distance by about 17 km. As a result, the construction of the bypass section shows a high E.R., approximately 40% for the first year. 5.13 For the economic evaluation the subproject was divided into four subsections. E.R.s range between 16-62% for the different subsections and the entire subproject yields a satisfactory E.R. of about 22%. Pristina-Leskovac Highway (S.A.P. Kosovo and S.R. Serbia) Hfakovac-Lisica-Petrilja Section 5.14 The improvement/reconstruction of this road would provide an all- weather route and shorten by about 70 km the average journey between Pristina and Leskovac. Recent origin and destination studies indicate that more than 200 vehicles per day, representing through traffic only, would have used the new highway in 1975 if it had been built. 5.15 Government's effort to develop this backward and isolated area is impeded due to lack of suitable communications. The new link would help to provide necessary medical, educational and other essential facilities in this remote area and would open up other possibilities for the future. Savings in vehicle operating costs, due mainly to the distance shortening for through traffic, are estimated to yield an ER of about 25%, amply justifying the proposed investment. 5.16 As an alternative to the first section of the project road, it would also be possible to improve an existing earth/gravel road, about 17 km to the north. However, this alternative would lengthen the journey distance between Pristina and Leskovac by about 14 km and would have much less devel- opmental impact than the project road. The latter is therefore a much better solution (4.09 and 4.10). Banja Luka-Klasnice Section (S.R. Bosnia-Herzegovina) 5.17 Traffic volume in 1975 was about 7,500 vehicles per day, of which about 27% were trucks. The proposed construction of a two-lane road along a new alignment would relieve the existing highway of all through traffic and make it available primarily for local traffic, pedestrian and slow-moving vehicles (4.11). The resulting savings from reduced road users' cost alone would yield an acceptable ER of about 15%. - 22 - C. Other Project Elements 5.18 Benefits were not quantified for the Studies on Road-User Charges and Rail Costs and for the technical assistance to Kosovo. However, these components are considered essential since they would assist the authorities in reviewing the policies and practical problems concerning the level and distribution of payments for transport infrastructure costs, and also in preparing a need-based integrated highway program in the economically less developed region of Kosovo. VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 During negotiations, agreement was reached on the following princi- paL issues: (i) the CRO would act as fiscal agent for the project and act as coordinator in matters relating to the Bank (4.25); and (ii) if any tolls would be introduced in the future on any of the project highways, such tolls would be set at rates that would ensure an economic use of such highways and alternative routes or means of transportation (4.23). 6.02 Conditions of loan effectiveness would be that the Borrowers: (a) will have adopted the legal authority authorizing construction of the respective road sections (4.21); and have given a gua- rantee covering the financing of such road sections, including possible cost overruns (para. 4.22); and (b) would have delegated authority to the Council of Road Organizations to act as fiscal agent for the project, as coordinator of disbursement requests to the Bank and as liaison agent between the Government and the Bank on project-related matters, including the study on Road-User Charges (para. 4.25). 6.03 With the assurances indicated above, the project would be suitable for a Bank loan of US$56.0 million to the road organizations of Serbia, Bosnia-Herzegovina, Kosovo and the Republic of Macedonia for a 15-year term including a 3-year grace period. February 1977 TABLE 1 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Freight Traffic by Mode of Transport, 1958-74 (billion m. ton-km) Maritime Road Inland Trucking Own 1/ Year Total Railwpay Waterway Coastal Enterprises Account 1958 16.3 13.0 1.5 0.3 0.6 0.9 1959 17.8 13.9 1.6 0.5 0.8 1.0 1960 20.5 15.2 2.0 0.4 1.0 1.9 1961 21.0 14.9 2.1 0.4 1.4 2.2 1962 21.6 15.0 2.2 0.4 1.6 2.4 1963 25.5 17.3 2.6 0.4 2.0 3.2 1964 28.6 18.3 3.1 0.4 2.4 4.4 1965 30.4 18.0 3.3 0.4 3.1 5.6 1966 32.0 17.5 3.9 0.3 3.6 6.7 1967 31.9 16.4 3.9 0.2 4.0 7.4 1968 35.2 16.4 4.3 0.7 4.8 9.0 1969 35.9 17.7 3.4 0.2 5.6 9.0 1970 41.5 19.3 4.4 0.3 6.7 10.8 1971 43.7 19.7 4.2 0.3 7.3 12.2 1972 48.9 19.2 4.6 0.4 8.1 16.6 1973 35.6 20.4 4.9 0.4 8.5 21.3 1974 64.6 23.1 5.5 0.4 9.8 25.8 Average Distance (kmi) 1965 241 359 283 84 17 1966 244 364 199 91 18 1967 238 358 147 98 20 1968 239 347 362 110 22 1969 252 256 118 98 18 1970 255 280 151 114 18 1971 259 249 144 102 17 1972 265 255 263 110 23 1973 274 262 189 116 23 1974 283 283 190 122 23 1/ Excluding freight carried by vehicles owned by private individuals Source: Federal Bureau of Statistics February 1977 TABLE 2 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Passenger Traffic by Mode of Tranp 1 (millions of passenger km) Road Passenger Airway Maritime Inland Year Railway Bus I' Car 2/ Domestic Coastal Waterway Total 1958 8,877 1,760 679 60 359 30 11,765 1959 9,250 2,231 936 82 352 26 12,877 1960 10,449 2,826 1,300 114 370 27 15,086 1961 10,089 3,139 1,812 136 361 23 15,560 1962 9,908 3,315 2,350 165 348 21 16,107 1963 10,673 3,876 2,700 267 304 16 17,836 1964 12,308 4,843 3,403 366 241 18 21,179 1965 12,800 6,025 4,507 480 215 16 24,043 1966 12,196 7,986 6 079 537 194 15 27,007 1967 10,753 9,599 9:111 3/ 532 119 8 30,122 1968 10,284 10,686 11,261 620 165 9 33,025 1969 10,470 12,547 14,400 890 182 12 38,501 1970 10,939 14,143 18,452 1,305 190 11 45,040 1971 10,566 16,691 22,407 2,000 228 6 51,898 1972 10,571 18,422 25,587 2,505 207 10 57,302 1973 10,571 21,146 27,580 3,192 210 11 62,710 1974 10,429 23,379 31,848 3,453 176 13 69,298 Average Distance (km) 1965 54 28 n.a. 757 44 43 1966 57 27 n.a. 907 50 46 1967 55 26 n.a. 833 36 37 [968 56 25 n.a. 835 47 168 :1969 59 26 n.a. 832 48 215 :L970 69 26 n.a. 859 48 208 1L971 72 27 n.a. 954 43 186 ]972 75 27 n.a. 1,037 37 167 1973 77 28 n.a. 1,040 34 200 1974 77 28 n.a. 1,041 29 209 1/ For buses interurban public services only 2/ Estimates for 1958-1966 based on assumption that each passenger car travelled about 9,600 km annually with an average occupancy rate of 2.5 persons per car 3/ Estimates for 1967-1974 based on assumption that each passenger car travelled about 12,800 ki annually with an average occupancy rate of 2.0 persons per car n.a. (not available) Source: Federal Bureau of Statistics: Statistical Bulletins 1958-1974 and mission estimates for passenger cars Febriary 1977 TABLE 3 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Cargo Handled by the Main Ports, 1958-74 (thousand m tons) Year Rijeka Sibenik Split Ploce Dubrovnik Koper Bar 1958 3,817 742 1,485 525 249 30 32 1959 3,965 875 1,873 429 321 48 21 1960 4,055 724 1,689 487 381 106 23 1961 4,057 762 1,729 572 460 161 35 1962 4,645 960 1,960 632 440 252 56 1963 5,943 937 2,401 645 504 609 79 1964 5,841 941 2,330 730 571 658 131 1965 6,205 960 2,015 758 568 762 223 1966 8,386 1,039 2,107 797 388 750 441 1967 7,966 680 1,626 1,017 315 813 632 1968 8,438 560 1,527 1,165 247 1,100 587 1969 7,925 651 1,336 1,144 245 1,805 654 1970 10,349 669 1,506 1,543 344 1,946 625 1971 10,740 645 1,758 2,183 358 1,909 753 1972 9,941 700 1,632 2,025 332 1,790 851 1973 10,483 897 2,516 2,476 246 1,862 780 1974 12,663 931 2,040 2,452 314 1,996 791 Source: Federal Bureau of Statistics February 1977 APPRAI S Al OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Public Roads in the Six Republics and Two Autonomous Provinces 1974 - (km) Republics Autonomous Provinces Total 2/ Type of Road Bosnia and Republics & Surface Class Herzegovina Croatia Montenegro Macedonia Slovenia 2/ Serbia Vojvodina Kosovo Provinces Paved I 1,525 2,468 562 705 831 2,235 661 402 9,389 II 1,282 3,149 255 502 2,250 1,929 1,279 266 18,268 III 489 2,718 69 146 - 2,625 1,057 252 - IV 80 2,509 232 908 1,604 1,674 527 189 7,723 3,376 10,844 1,118 2,261 4,685 8,463 3,524 1,109 35,380 Gravel I 234 136 81 249 18 47 - 21 786 II 1,226 1,370 332 320 1,709 564 114 103 14,431 III 1,513 3,711 191 254 - 2,416 416 192 - IV 207 7,204 1,335 554 7,152 5,101 188 564 22,305 3,180 12,421 1,939 1,377 8,879 8,128 718 880 37,522 Compact I - 1 - - - 13 14 - 28 Earth II - - - 51 _ 128 162 26 2,826 III - 86 - 301 - 1,082 465 525 - IV 3,344 2,189 247 3,118 384 9,289 2,733 1,312 22,616 3,344 2,276 247 3,470 384 10,512 3,374 1,863 25,470 All Types I 1,759 2,605 643 954 849 2,295 675 423 10,203 II 2,508 4,519 587 873 3,959 2,621 1,555 395 35,525 III 2,002 6,515 260 701 - 6,123 1,938 969 - IV 3,631 11,902 1,814 4,580 16,064 3,448 2,065 52644 9,900 25,541 3,304 7,108 13,948 27,103 7,616 3,852 98,372 1/ Preliminary data 2/ For Slovenia and Total Republics and Provinces. Road class I: Interregional II: Regional IV: Local Source: Federal Bureau of Statistics, Statistical Bulletin 1974 February 1977 TABLF 5 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Modernization of the Highway System, 1958-74 (kin) Annual Increase of Total Length of Year Paved Road Network Paved Road Network 1958 833 5,014 1959 1,047 6,061 1960 699 6,760 1961 985 7,745 1962 1,255 9,000 1963 1,053 10,053 1964 1,544 11,597 1965 1,353 12,950 1966 1,424 14,374 1967 1,614 15,988 1968 2,715 18,703 1969 3,041 21,744 1970 2,470 24,214 1971 3,136 27,350 1972 2,523 29,873 1973 2,833 32,706 1974 2,674 35,380 1/ All types of paved roads. Many are former gravel roads paved with a thin bituminous surface and in general will require improvement in the next few years. Source: Federal Bureau of Statistics, Statistical Bulletins 1958-1974 February 1977 TABLE 6 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Registered Motor Vehicle Fleet 1958-74 (thousand units) Motor- Passenger Trailers & Year cycles Cars Buses Trucks Others Total 1958 37.6 28.3 3.9 43.6 12.8 125.2 1959 54.5 39.0 4.6 49.8 16.3 164.2 1960 69.7 54.2 5.1 54.6 19.4 203.1 1961 72.1 75.5 5.2 50.2 16.6 219.9 1962 91.0 97.9 6.1 58.0 19.2 272.2 1963 98.0 112.5 6.6 64.5 20.3 201.9 1964 102.2 141.8 7.4 72.6 21.8 345.8 1965 106.4 187.8 8.2 84.2 24.7 411.5 1966 112.8 253.3 9.8 98.8 27.6 501.8 1967 111.9 355.9 11.2 117.2 31.7 627.9 1968 107.0 439.9 12.3 122.9 23.1 715.2 1969 111.9 562.5 13.3 131.2 36.0 854.9 19'0 107.7 720.8 14.8 148.0 40.7 1,032.0 1971 106.3 875.3 16.4 167.6 43.7 1,209.3 1972 96.4 999.5 17.7 181.6 49.0 1,344.2 1973 86.1 1,140.5 17.8 195.6 56.5 1,496.5 1974 86.3 1,333.0 19.2 220.9 67.0 1,726.4 Source: Federal Bureau of Statistics, Statistical Bulletins and Others 1958-74 February 1977 TABLE 7 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Highway Expenditures in 1974 (Din Millions) Republics & Autonomous New Paving of 1/ Provinces Construction Reconstruction Gravel Roads Maintenance Total Bosnia - Herzegovina 688 380 211 181 1,460 Croatia 488 20 392 300 1,200 Macedonia 231 10 - 61 302 Montenegro 60 40 10 30 140 Serbia 87 772 - 266 1,125 Slovenia 439 97 129 315 980 Kosovo 11 180 - 27 218 Vojvodina - 74 38 96 208 Total 2,004 1,573 780 1,276 5,633 1/ Includes winter service and periodic maintenance Source: Federal Committee for Transport and Communications February 1977 TABLE 8 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Financing of Highway Expenditures, 1958-74 (Din Millions) Federal Regional and 2/ Total Investment Year Government - Local Authorities and Maintenance 1958 161 180 341 1959 199 203 402 1960 271 223 494 1961 370 277 647 1962 326 324 650 1963 316 482 798 1964 411 614 1,025 1965 193 802 995 1966 140 908 1,048 1967 207 1,224 1,431 1968 286 1,679 1,965 1969 210 1,981 2,191 1970 209 2,383 2,592 1971 74 2,871 2,945 1972 75 3,825 3,900 1973 23 4,302 4,325 1974 204 5,429 5,633 1/ Investment only 2/ Funding of highway investments and maintenance by Republics, districts, communes, donations from industrial and commercial enterprises, and public lcans. Source: Federal Committee for Transport and Communications February 1977 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Financing of Highway Expenditures in 1974 (Din Milliorns) Republics and Funds for Republics Autonomous Earmarked 1/ Loans and Federal Underdeveloped and Provinces REsources - Credits Government Regions Communes Other Total Bosnia- 297 693 82 20 368 - 1,460 Herzegovina Croatia 700 50 - - 400 50 1,200 Macedonia 101 60 45 - 96 - 302 Montenegro 70 5 25 40 - - 140 Serbia 451 234 32 91 313 4 1,125 Slovenia 574 314 20 - 72 - 980 Kosovo 84 1 - 62 48 23 218 Vojvodina 183 - - - 25 - 208 2,460 1,357 204 213 1,322 77 5,633 1/ Revenues from certain taxes on gasoline and oil, license fees and taxes paid for foreign motor vehicles entering Yugoslavia; about 41% of these revenues were earmarked in 1974 for highway improvement and maintenance. Source: Federal Committee for Transport and Communications February 1977 APPRAISAL OF AN EIGHTH HIGWAY PROJECT YUGOSLAVIA Design Characteristics of Project Roads Unit Mali Pozarevac-Ralja Kumanovo-Miladinovci Miladinovci-Petrovec Petrovec-Katlanovo Katlanovo-Titov Veles BanJa Luka-Klasnice Pristina-Leskovac Type of Terrain - Hilly Rolling Flat Flat Hilly Flat/Rolling Hilly/Mountainous Design speed km/hr 120 120 120 120 100 120 40 Max. Gradient 2 1 4 3 3 5 2 9 Carriageway Width D 2x 7.5 7.5 7.5 7.5 7.5 7.5m 6m Emergency Lane Width m 2x 2.5 2.5 2.5 2.5 2.5 2x 2.5m Shoulder Width to 2x 1.0 1.0 & 2.0 1.0 & 2.0 1.0 & 2.0 1.0 & 2.0 2x 1.0m 2 x l.Om Minimum Radius Horizontal Curves D 700 700 700 700 500 600 40D Minimum Radius Vertical Curves Summits D 20,000 20,000 20,000 20,000 18,000 20,000 4,000 Sags D 18,000 18,000 18,000 18,0n0 12,000 18,000 2,000 Maximum Single Axle Load ton 10 10 10 10 10 10 10 N Type of Wearing Surface - Asphaltic Asphaltic Asphaltic Asphaltic Asphaltic Asphaltic Surface n Concrete Concrete Concrete Concrete Concrete Concrete Dressing Source: Republican and Provincial Road Organizations February 1977 TABLE 11 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Average Daily Traffic (Units) Cars Heavy Trucks/ Year and Taxis Buses Trucks Truck Trailers Total (1) (2) (3) (4) (5) (6) Mali Pozarevac - Ralja Section (28.0 km) - Serbia 1975 7,908 714 1,871 850 11,343 1980 12,600 990 2,090 1,320 17,000 1985 16,455 1,135 2,145 1,715 21,450 1990 19,170 1,200 2,215 2,015 24,600 2000 27,000 1,400 2,600 3,000 34,000 Kumanovo - Miladinovci Section (18.9 km) - Macedonia 1975 4,615 317 822 794 6,548 1980 7,560 360 1,160 1,220 10,300 1985 10,930 420 1,630 1,720 14,700 1990 16,080 480 2,160 2,280 21,000 2000 25,870 610 2,670 2,850 32,000 Miladinovci - Petrovec Section (8.8 km) - Macedonia 1975 2,095 122 376 398 2,991 1980 3,050 115 540 745 4,450 1985 4,450 130 770 1,050 6,400 1990 6,650 150 1,000 1,400 9,200 2000 11,600 200 1,230 1,770 14,800 Petrovec - Katlanovo Section (5.9 km) - Macedonia 1975 4,979 467 1,364 1,072 7,882 1980 8,140 540 1,980 1,590 12,250 1985 11,760 630 2,780 2,230 17,400 1990 16,680 720 3,650 2,950 24,000 2000 26,160 920 4,550 3,670 35,300 Katlanovo - Titov Veles Section (19.0 km) - Macedonia 1975 4,912 375 1,135 1,005 7,427 1980 8,420 440 1,680 1,510 12,050 1985 12,200 500 2,350 2,100 17,150 1990 17,520 580 3,100 2,800 24,000 2000 27,500 750 3,850 3,500 35,600 Makovac - Lisica - Petrilja Section (39.6 km) - Kosovo 1975 128 12 64 8 212 1980 314 20 127 14 475 1985 475 25 180 20 700 1990 650 30 245 25 950 2000 1,000 50 370 30 1,450 Banlaluka - Klasnice Section (9.3 km) - Bosnia - H9erzegovina 1975 5,200 300 1,600 400 7,500 e 1980 8,500 220 2,530 550 11,800 1985 12,500 250 3,500 750 17,000 1990 18,500 450 5,000 1,050 25,000 2000 23,000 700 6,500 1,800 32,000 1/ Existing traffic in 1975 and forecasts for later years. Source: Feasibility studies of the project roads and mission estimates February 1977 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Motor Vehicle Operating Costs and Savings per k J Dinar, net of taxes Mali Pozarevac - Ralia Kumanovo - Titov Veles Makovac - Petrilja Banjaluka - Klasnice Existing Proposed % Existing Proposed % Existing2./Proposed % Existing Proposed Highway Highway Saving Saving Highway Highway Saving Savinz Highway Highway Saving Saving Highway Highway Savin Saving Pass v er 1.281 1.025 0.256 20 1.245 0.997 0.248 20 1.105 1.031 0.074 7 1.240 1.009 0.231 19 Car/ Bus .2/ 6.202 4.822 1.380 22 6.189 4.788 1.401 23 5.297 4.896 0.401 8 5.860 4.359 1.501 26 (45 seats) Truck 5.713 4.563 1.150 20 5.637 4.412 1.225 22 5.220 4.863 0.357 7 5.538 4.235 1.303 24 (9 m ton) Truck Trailer 8.024 6.522 1.502 19 7.892 6.181 1.711 22 7.157 6.689 0.468 6 7.847 6.145 1.702 22 (20 m ton) 2/ Relate to opening year of project roads v Relates to existing circuitous route / Excludes passenger time Source: Feasibility studies of the project roads and mission estimates February 1977 TABLE 13 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Economic Returns and First Year Returns Sensitivity Analysis First Proportion of Most Probable Lower Higher 2/ Year Benefit Highway Section Total Investment Estimate Estimatel/ Estimate- Ratio Kali-Pozarevac-RalIa 35 24 18 30 17 iumanovo-Titov Veles 47 22 16 28 14 (i) Kumanovo-Miladinovci 16 12 20 10 (ii) Miladinovci-Petrovec 62 45 80 40 (iii) Petrovec-Katlanovo 21 16 26 14 (iv) Katlanovo-Titov Veles 16 12 20 11 Pristina-Leskovac Makovac-Lisica-Petrilja 7 25 19 31 18 Banjaluka-Klasnice 11 15 11 19 11 Assumes a 15% increase in construction costs, combined with 15% decreases in users' cost savings. 2/ Assumes a 15% decrease in construction costs, combined with 15% increases in users' cost savings. Note: Economic Returns are evaluated at domestic price excluding taxes. Further adjuRtments of shadow prices for foreign exchange, labor,etc., do not change the results by more than 0.5%. Source: Feasibility studies of the project roads and mission estimates. February 1977 ANNEX I Page 1 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Study of Road User Charges Background 1. In many countries, as well as in Yugoslavia, certain charges for public transport may be below cost. At present the Yugoslav railways are facing increasing deficits and both the Governments and the Railways apparently wish to cover these deficits by various subsidies including a contribution to infrastructure costs. The justification claimed is that road transport by diesel trucks does not pay its fair share of infrastruc- ture costs -- an issue open to conjecture. 2. In Yugoslavia the total revenue from taxes on gasoline and oil, license fees as well as the revenue from taxes paid by foreign motor vehicles entering Yugoslavia yielded about Dinar 6.0 billion (US$0.33 billion) in 1974 c:ompared to a total outlay of about Dinar 5.6 billion (US$0.31 billion) on the construction and maintenance of all interurban highways. But even where they may cover overall costs, there may not be a direct relation between specific user charges on different types of vehicles especially heavy trucks and the :infrastructure costs for which they are accountable. These practices may lead to distortions in traffic flows within and between different transport modes. The Bank has no evidence that road users as a whole do not pay their full road infrastructure costs in Yugoslavia, but cross subsidies may favor heavy diesel trucks which inflict the most damage on the roads, because diesel carries substantially less (about half) tax than gasoline. To clarify this situation with respect to road transport in Yugoslavia, the project includes, as an important component, a study on road user charges. PIurpose of the Study 3. To examine the fiscal, economic and administrative aspects of the present system of Levying road user charges, taxing vehicles and allocating resources to the highway sector in Yugoslavia. After reviewing the existing situation and taking into account Yugoslavia's position with respect to the European Economic Community, the study will make recommendations concerning appropriate pricing policies and systems for levying road user charges to achieve an optimal economic utilization of present and proposed road (in- cluding urban road) facilities. The study will also ascertain the present distribution of revenues from each and all types of road user charges among the recipient authorities, and the effects of any recommended changes in road user charges on such revenues, the cost of transport and the prices of typical commodities. ANNEX 1 Page 2 Scope of the Study 4. The study will set out first the existing structure and level of present road user charges for each major vehicle type and recommend the user charges which should be levied on each of the selected vehicle types, operating on the interurban as well as the principal urban networks. The study will consider alternative road pricing policies setting out the advantages and disadvantages of each. February 1977 AITNEX 2 Page I APPRAISAL OF All EIGIHTH HIGHWAY PROJECT YUGOSLAVIA Study of Rail Costs Background 1. Each of the five Railway Transport Enterprises (RTEs), which together form the railway system of Yugoslavia, is composed of a number of Basic Organizations of Associated Labor (BOALs), each of which is responsible in the first place for its own accounting and cost recording. IWhile a con- siderable amount of detailed cost information may already exist in individual BOALs, a main task in the introduction of a costing system would be in codify- ing and extracting this information and in ensuring the use of standard methodology in data collection, processing and presentation. Purpose of the Study 2. The purpose of the study is to establish a cost accounting system which will make available to railway management the data which is necessary for the continuing analysis, comparison and control of costs. It will arrange for the provision of cost information for the fixing of freight rates and passenger fares and for a comparison of costs with different transport modes. It will enable the evaluation of net revenue benefits which may be obtained from operating and technological changes and from capital investments. It will establish a methodology for the determination of the cost of surplus staff. Scope of the Study 3. The study will be carried out in two phases with assistance as required from consultants and under the direction of a steering group compris- iag external participants and RTEs' senior management, preferably not below tne grade of Assistant General MIanager. Phase I will include a survey of basic cost data already available and of costing methods in use and will recommend the steps necessary for the determination of the costs of all railway services broken down by principal commodity flows and inter-city and commuter passenger services. It will summarize and review the existing system of rates and fares. It will detail the methodology for the evaluation of the cost to the railways of the employment of surplus staff. It will define costing principles and make preliminary recommendations for Phase II. ANNEX 2 Page 2 4. Phase II will provide for the refinement and improvement of cost data resulting from Phase I in order to achieve a comprehensive system for cost comparison and control. It will make detailed recommendations for the improvement of data needed for tariff setting. It will analyze the relation- ship between tariffs and costs and, if appropriate, make recommendations for different tariff policies and discuss their implications with reference to government support measures. It will complete a review of uneconomic lines under existing methodology. February 1977 ANNEX 3 Page 1 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Highway Master Plan for Kosovo Background 1. The Socialist Autonomous Province of Kosovo is a roughly quadratic shaped region measuring about 100 by 100 km and is the most underdeveloped and densely populated region of Yugoslavia. In transport and communications the Province faces problems of accessibility from different parts of the country. Inside the Province many rural settlements still have no all-weather connection. This has immediate economic consequences through the lack of access to markets and employment possibilities. In addition, it impedes breaking the circle of inadequate development, overpopulation and poverty. In order to provide the Provincial Government with the framework of a highway development program with priorities ranked on economic criteria, the project includes technical assistance for the preparation of a highway master plan for Kosovo. Objectives 2. The purpose of the study is to provide: (i) a general highway master plan, and cost estimates therefore, for the period 1978-1985 formulating a concept of long term development of the road network including a maintenance plan; (ii) a detailed highway investment program for the period 1978-80, including the ranking of proposed projects based on economic priorities, and subsequent highway investment programs in outline which shall cover the period 1981-85, and also including a preliminary ranking of proposed projects by economic priorities; (iii) recommendations for: (a) amelioration of those financial and managerial constraints hampering the general expected level of road construction and maintenance; (b) such organizational modifications/strengthening required for improving the operation and administration of road system; and (c) training for local people in the fields of highway admin- istration and operations. ANNEX 3 Page 2 Scope of the Study 3. The study shall review and analyze the existing highway inventories and based on reconnaissance surveys divide it into two broad groups for de- tailed analyses and quantitative economic evaluation purposes. Group I will consist of those road works for which improvements appear to have considerable benefit potential and which therefore required detailed field inventories and analyses to establish and confirm their relative priorities. Group II will consist of all other road works for which improvements appear to have a lower level of potential benefits. The focus of the highway master plan would be on such factors as: (i) the adequacy of the proposed program in relation to the development needs of the region; (ii) the balance of investments in main roads, secondary roads and feeder roads; (iii) appropriate role of highway investments in relation to other modes of transport; (iv) the adequacy of the planned program of maintenance; and (v) the adequacy of the organization of handling highway administration, procurement procedures, construction supervision and related institutional facilities required to support the execution and operation of the program. February 1977 t ANNEX 4 Page 1 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Transportation Projects Previously Financed by the Bank Pr-evious Projects 1. So far the Bank has lent US$620.4 million in total to the transport sector, including US$220 million for six highway projects, US$108.4 million for two pipeline projects, US$248 million for four railway projects and US$44 million for the Bar port project. HigShway Projects 2. The first highway project (Loan 344-YU, US$35 million) was financed in 1963 for the completion of the coastal section of the Adriatic Highway (422 kin) and parts of the Belgrade-Nis road (174 km). The second highway project (Loan 485-YU, US$10 million), financed in 1967, was for the improvement of 367 km of roads connecting the Zagreb-Belgrade highway via Sarajevo and Tuzla with the Adriatic highway. Both projects were completed within the original cost estimates and agreed time schedules. The third (Loan 608-YU, US$30 million), financed in 1969, comprised about 120 km of roads in Croatia, Miacedonia and Siovenia, and was completed in August 1974 with a 20-month delay primarily due to delays in completing an access road, but which did not impede the operation of the main highway. This project had an 8% cost overrun, because of inflation and foreign exchange adjustments. The Operation Evaluation Department's Project Performance Audit Report (No. 1385 dated December 10, 1976) highlights that the Third Highway Project has been successfully completed with most civil works carried out close to the appraisal schedule. The Audit Report, however, emphasizes the need to adequately study tolls, so that their imposition does not impede the optimum use of roads and this caution has been taken into account in the proposed project. The fourth (Loan 678-YU, US$40 million) was financed in 1970 for the construction of about 220 km of roads in Bosnia- Herzegovina, Kosovo, Montenegro, Serbia and Vojvodina. Because of expropria- tion problems in the section of Bosnia-Herzegovina, the project was completed in December 1975 with 18 months delay. There was a 12% cost overrun due to inflation and foreign exchange adjustments. The fifth highway project (Loan 751-YU, US$35 million) became effective 8 months late due to Government ad- ministrative delays. The project comprises 153 km of roads in Kosovo, Macedonia and Slovenia, procurement of US$1.7 million worth of engineering equipment, consultants' services and a staff training component to improve highway plan- ning and project preparation. All roads are open for traffic. The engineering ec[uipment is being delivered and the consultants' services are completed. The st:aff training component was delayed because of difficulties encountered in securing training of candidates in the head office of foreign consultants and ANNEX 4 Page 2 in foreign institutes and because of language problems. A restricted program is now well underway and the remaining part of the program may be modified by inviting foreign consultants and specialists to give training courses in Yugoslavia. Present estimates indicate an 8% cost overrun because of the combined effect of inflation and foreign exchange adjustments. Because of the delay in training it is expected that the project will be completed by the middle of 1977, involving a delay of about nine months. The loan for the sixth highway project (Loan 990-YU, US$30 million) was made in May 1974 and became effective six weeks later than estimated in December 1974. The project finances six road sections in Bosnia-Herzegovina, totalling 150 km, the training of transportation economists and road engineers and US$1.1 million worth of engineering and laboratory equipment. Two out of six road sections are completed. The remaining sections should be completed on time by the end of 1976. The loan for the seventh highway project (Loan 1143-YU, US$40 mil- lion) was made in July 1975 and became effective in March 1976. The project comprises about 90 km of road construction in Slovenia, Serbia and IMontenegro, and US$0.1 million worth of technical assistance to improve preparation of highway feasibility studies and to provide a related training program. The work has progressed satisfactorily in Serbia but is slightly behind schedule in Montenegro and Slovenia, because of expropriation problems and government delays. Construction works for all seven projects have been or are satisfac- torily carried out, reflecting the competence of the Yugoslav contracting industry. Naftagas and Oil Pipeline Projects 3. The loan for the Naftagas project (Loan 916-YU, US$59.4 million) was made in June 1973, but, due to organizational reforms within the enterprise, became effective in March 1974 after six months delay. Due to a substantial increase in the project costs and a reallocation of priorities in the use of natural gas which caused the elimination of some consumers who withdrew their finances from the project, a delay of more than two years in project implemen- tation has occurred. It has now been decided that the actual implementation will be carried out in three phases of which only phases I and II will be implemented now, the additional funds required being provided by different agencies in Yugoslavia and by a supplementary loan of US$11 million from the Bank under the Sarajevo Air Pollution Control Project - Loan 1264-2-YU. Construction started in late June 1976 and the project is scheduled for completion by year end 1978. The loan for oil pipeline project (Loan 1173-YU, US$49.0 million) was made in November 1975 and became effective in July 1976 after four months delay. The project comprises the procurement, construction and/or installation of an oil receiving port in the Adriatic and related distribution system. Phase I will provide a yearly capacity of 16 million tons and will be completed in May 1978; Phase II, providing a capacity of 20 million tons annually, will be completed a year later. Due to slower than anticipated progress of design and procurement, it is estimated that a four- month slippage in the completion of the Phase I will occur, though it should still be possible to complete the balance of the project on schedule. ANNEX 4 Page 3 R'ailways 4. The first railway loan (Loan 361-YU, US$35 million) was made in 1963 and was substantially completed and put into operation in 1970, i.e., with a delay of about two years. The second railway loan (Loan 395-YU, UrS$70 million) was made in 1964 to help finance a Modernization Program for the main lines. The Program, which covers electrification, signalling, telecommunications and marshalling yards, was to be executed between 1964 and 1968, at an estimated cost of US$185 million, but due to long delays completion is not expected before 1977. The total cost is estimated at about US$405 million. The loan was fully disbursed in November 1972 and completion cf the Program is being assisted by the Fourth Loan (below). The third rail- way loan (Loan 531-YU, US$50 million) in 1968 helped to finance the completion of 372 km of the Belgrade-Bar line. Completion was orignally scheduled for 1973, but geo-technical and other construction difficulties in mountainous terrain delayed the opening of the line until 1976. The cost estimate has increased from US$225 million to about US$350 million. The fourth railway loan (Loan 1026-YU, US$93 million) was made in July 1974 and became effective by the revised date of February 12, 1975. The loan finances the completion of the 1964 Modernization Program and certain related investments, including track rehabilitation and further signalling works, which are needed to obtain the full benefits of the program. There have been serious delays in project execution due principally to financial and administrative difficulties. Government efforts to combat severe inflation have caused freight rates to lag too far behind the increase in railway costs resulting in large financial deficits. The railways now expect an acceleration of project execution and it is hoped that most of the Bank-financed investments will be completed by the end of 1978. Port of Bar Project 5. The loan (Loan 1060-YU, US$44 million) was made in November 1974 to finance port and railway facilities. The date for the loan to become effective was postponed from Mlay 12, 1975 to June 13, 1975. The project is now about 9 months behind schedule due to delays on procurement of grain silos and retendering and negotiations with the lowest bidder for the main items of civil works. February 1977 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Organization Chart of the Road Council of S.R. Macedonia Republic Assembly S.R. Macedonia 4I Executive Council Secretariat for Traffic & Communication Road Inspection Council for Road Construction, Maintenance and Reconstruction Secretary of the Road Council Department for Department for Department for Department for Development of Supervision of Road Department for Budget & GeneralM Road Network Construction & Maintenance Accounts AdTninistrationM . ~~~~~Reconstruction. February 1977 ANNEX 6 Page 1 APPRAISAL OF AN EIGHTH HIGHWAY PROJECT YUGOSLAVIA Description of Project Roads Mali Pozarevac-Ralja (28 km) 1. This section is part of the Belgrade-Nis (Trans-Yugoslav) highway leading to Sofia and Athens. Because of heavy congestion, the present limited access road requires upgrading to four-lane divided standards. Both horizon- tal and vertical alignments of the present road are satisfactory; the addi- tional facilities therefore will be provided by adding a second two-lane carriageway with an emergency lane. However, the pavement of the existing road is now in poor condition and because of poor geological conditions, there have been numerous subsidences; it will be reconstructed as needed with the addition throughout of an emergency lane. The project includes two major interchanges. Kumanovo-Titov Veles (52.7 km) 2. The present limited access road, passing through the city of Skopje was constructed between 1960 and 1962 as part of the first class highway (Trans Yugoslav Highway) linking Yugoslavia with Greece. Although the geo- metric elements of the existing road are, for the most part acceptable, and the pavement has stood up well under the traffic load, capacity constraints now dictate the addition of a second two-lane carriageway throughout. From Kumanovo to Miladinovci (18.93 km) the new carriageway comprising two traffic lanes and an emergency lane will be on the right of the existing road. A new railway crossing structure and a new bridge over the Lipkovska River and interchanges at Kumanovo and Miladinovci are the main structural features of this section. The section Miladinovci-Petrovec (8.84 km) forms a by-pass oi- Skopje, saving 17.4 km for through traffic. The new carriageway crosses flat to rolling terrain and joins at Petrovec on the existing highway to Skopje at an interchange. The section Petrovec-Katlanovo (5.94 km) again is in flat to rolling terrain and the new carriageway would therefore be built aLongside the present road. The geometry of the existing road is good and the only structural feature is a crossing of the Peinje river. Because of the mountainous nature of the section Katlanovo-Titov Veles (18.98 km) the new carriageway leaves the alignment of the existing road. The steepness and rugged nature of the terrain necessitates the construction of twenty viaducts with total length of 2,960 m and three tunnels with a total length of 930 m. AE; there is no habitation along the existing road and the new road, and therefore no local traffic needs to be served, each carriageway will carry unidirectional traffic flows, making the best use of the capacity of both the new construction and the present road. ANNEX 6 Page 2 Banja Luka-Klasnice (9.3 km) 3. The existing road is narrow (6.0 m + 2 x 0.8 m shoulders) with substandard geometric elements. It passes through four townships, Ploce, Trn, Zalozak, Lomister, and 37 village roads connect with it. There is ribbon-development along almost its whole length. The proposed highway, the first two-lane carriageway of an ultimate four-lane divided highway with limited access linking Banja Luka with Okucani on the Trans Yugoslav highway has been aligned in rolling terrain to the West of the existing road, and is free from the ribbon-development problems that have contributed to present traffic congestion. At Banka Luka, an interchange will link the city with the new road and the existing road. At Klasnice, a temporary at-grade inter- section will link the new and old roads. Pristina-Leskovac (40 km) 4. Of the 102 km route linking Pristina and Leskovac, about 62 km is paved and the balance of 40 km between Pristina, Makovac and Petrilja in hilly terrain, is gravel/earth in very poor condition with very substandard geometric elements. The proposed project road, most of which is in Kosovo, but with a short section in Serbia, follows generally the alignment of the existing road, but to acceptable geometric standards. The project also includes construction of about 2 km of connecting road, to the same design standards, within the Municipality of Pristina. February 1977 YUCOSLAVIA APPRAISAL Op AN EICHrS hIGHWAY PROJECT PROJECT IMPLENENUArlCti SCHEDULE . 1 977 1 97 1 979 90 ITEM ACTIVITY ACTION BY M F M MJ A 6 O C .1J F l A MJ J A C O J *IJ F MAMJ J A I e O J F A J 4 A CUD 1. Bank Loan 1.01 Negotiations G--veretent/Blak t 1.02 Sign Lean Agreement C-ve-rent/Beok, _ _ _ _ _ _ _ 1.03 LOa DEfnecniveness _ Gverp=e.nt/BDDk _ _ _ _ _ _ |_ _I - 2. Canstruntein of Roed 2.01 Prnpare Bid Doc-meste ioverntenst Na1i P.narevne knIja 2.02 Prequalify Contr-etors Goveronnnt | (Serbia) 2.03 Bidding GoverDment 2.04 Ev-inate Bids 6 Award Government/Bank 2.05 C.terrunnien ievecnmest/Gonrrecger _ _ _ _ _ _ _ _ 3. Conanrtcti_n of Read 3.01 Prepare Did DGne,m-nts Governrent Kis-aO-v-TitOe Veles 3.02 Preqvulify Contractar Governuent (han.dmnia) 3.03 BNdding Governseot t | 3,4 Evaluate Bids & Award Govaeaeoet/Bask 3.25 Conatrrstion Government/Contractor - 4. COgarruetnj of Read 4.01 Prepare Bid Dfeenemnt Government Banja Lska-Klaunice 4.02 Preqsalify Cqntractora Government I (Beamia-bHereeg-ona) 4.03 Bidding Grovermeene 4.04 Evaluete Ride 6 Awn-d ioe-ronmnt/B-ak | 4.05 Constru_ti_n Governmenn/iontracror 5. Cenarrnetiem of Read 5.01 Prepare Bid Docncenta t nverna,sn Priattn.-L.a.kva- 5.02 Pre-nalify Conrractora Government (gosovo) 15,03 Bidding Goverent| ! 5.04 Evaluate Bide & Award Govern- ent/nank 5.05 Cosatroction iove--rent/Co-t-cotr 6. Rmad-Uase Charge Study 6.01 Prepare Termm of Reference GovernBent/B6nk CRo 6 02 Invite Pr-posein Gocerneno- 6.03 Evaln_te Proposals 0 iovernmess/Baok tt _ AMaid Catur-tt 6 04 Exeoste Study G.vernmeat/Censoltont 7 lama Dnalst.r Plan 7.01 Prra .er_a Raferaa Govranth nk (Tonovo) O7.0 InvIte Pr.po.aln Government 7.03 Evalsate Proposals & Gi-ernoo-t/Book Award Contract 7.04 Oi ecate Study Governm- nt/Co...ltanrt S. Ril Cost Study 0.01 Prepare Tertu of Reference Gover-ent/Book CvR 8.02 Invite Proposals Govesn-ent 0.03 Nnelusts Peuposnal 6 Govern.e.t/Bank Awerd Contract 80.4 Eneoste Stedy Govern- ert/C-cnrltat_ February 1977 ANNEX 8 YUGOSLAVIA APPRAISAL OF AN EIGHTH HIGHWAY PROJECT Schedule of Cumulative Disbursements IBRD Fiscal Cumulative Disbursement Year and Quarter at End of Quarter (US$Million) 1977/78 Sept. 30, 1977 0.73 Dec. 31, 1977 2.21 Mar. 31, 1978 5.07 Jun. 30, 1978 9.19 1978/79 Sept. 30, 1978 13.99 Dec. 31, 1978 20.27 Mar. .31, 1979 27.53 Jun. 30, 1979 34.68 1979/80 Sept. 30, 1979 41.44 Dec. 31, 1979 46.48 Mar. 31, 1980 50.37 Jun. 30, 1980 53.12 1980/81 Sept. 30, 1980 55.04 Dec. 31, 1980 56.00 Source: Mission estimates January 1977 February 1977 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _e_ - - - - t - IBR D 10 862R l ~~ / ((~~~~OCPR 1976 A U S Ts R I A . i r f X i - . 4 <>x 0 ;; : . \ N- P w: ;R 0 M A N I A 0:~~~~~~~~~~~~~~~9 H.ghe P ojs lp~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ e =ltX\' 1 YUGOSAVIA co Po -. Pt to t PUoSLAt HIGHWAY SYSTEM UT.ll'''oel PTA - Roitecoyc~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~l ) ~~~~~~~~~~~~~_ __C4he Cbs2 I Hqghw-ys 6C>y FiWs,'ifn, ThIrd, .,d Fou th High..y P .I-f iM' g I 2 t 6ttroth Hghoro yoct td ie ,SH/ ~~~Z >< JUJOIA ~~~Prs2p-d Eighih HSighw-y Po.jecd4 >X tni < > El YUGOSLAVIA 1 n oooPiePitn elo S oes *0s ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ . K- P.1 -4 _',tw Soi-EER (5t f t i °^>b - , r > Gi R E E C E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~G R I . . - 1 -- I l _ IG i I PP 23~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-'-c-